-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UJUGwMFKolKeQNqWLt8hmMuZGG4j+V9lwUEzrHQgwQZ8oYRr2s6ltHofRT8dW5zV xOftd7vPFhRh0EMWQkHkVg== 0000927016-98-002387.txt : 19980616 0000927016-98-002387.hdr.sgml : 19980616 ACCESSION NUMBER: 0000927016-98-002387 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980615 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATURAL FOODS INC CENTRAL INDEX KEY: 0001020859 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-GROCERIES & GENERAL LINE [5141] IRS NUMBER: 050376157 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21531 FILM NUMBER: 98648315 BUSINESS ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 BUSINESS PHONE: 8607792800 MAIL ADDRESS: STREET 1: PO BOX 999 STREET 2: 260 LAKE RD CITY: DAYVILLE STATE: CT ZIP: 06241 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 000-21531 UNITED NATURAL FOODS, INC. (Exact name of Registrant as Specified in Its Charter) DELAWARE 05-0376157 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 260 LAKE ROAD DAYVILLE, CT 06241 (Address of Principal Executive Offices, Including Zip Code) Registrant's Telephone Number, Including Area Code: (860) 779-2800 ___________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [_] As of June 15, 1998, there were 18,175,218 shares of the Registrant's Common Stock, $0.01 par value per share, outstanding. ================================================================ UNITED NATURAL FOODS, INC. FORM 10-Q FOR THE QUARTER ENDED APRIL 30, 1998 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of April 30, 1998 and July 31, 1997 Consolidated Statements of Income for the three months and nine months ended April 30, 1998 and 1997 Consolidated Statements of Cash Flows for the nine months ended April 30, 1998 and 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K Signatures PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (Unaudited) April 30, 1998 July 31, 1997 -------------- ------------- ASSETS ------ Current assets: Cash $ 2,308 $ 952 Accounts receivable, net of allowance 48,548 42,952 Notes receivable, trade 835 866 Inventories 90,345 71,509 Prepaid expenses 4,379 4,110 Deferred income taxes 1,032 1,032 -------- -------- Total current assets 147,447 121,421 Property & equipment, net 42,487 32,412 Other assets: Notes receivable, trade 1,099 995 Goodwill, net 19,807 7,579 Covenants not to compete, net 729 592 Other, net 711 1,562 -------- -------- Total assets $212,280 $164,561 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 56,588 $ 27,222 Current installments of long-term debt 2,472 3,016 Current installment of obligations under capital leases 479 681 Accounts payable 30,874 30,536 Accrued expenses 9,190 6,488 Income taxes payable 857 377 -------- -------- Total current liabilities 100,460 68,320 Long-term debt, excluding current installments 27,535 20,411 Deferred income taxes 678 678 Obligations under capital leases, excluding current installments 918 1,236 -------- -------- Total liabilities 129,591 90,645 -------- -------- Stockholders' equity: Common stock, $.01 par value, authorized 25,000 shares; Issued 17,404 and outstanding 17,375 at April 30, 1998 Issued 17,377 and outstanding 17,357 at July 31, 1997 174 174 Additional paid-in capital 50,272 51,842 Unallocated shares of ESOP (2,788) (2,910) Retained earnings 35,340 24,854 Treasury stock, 29 and 20 shares, respectively, at cost (309) (44) -------- -------- Total stockholders' equity 82,689 73,916 -------- -------- Total liabilities and stockholders' equity $212,280 $164,561 ======== ======== See notes to consolidated financial statements. UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, --------- --------- (in thousands, except per share data) 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $187,581 $158,890 $538,940 $465,958 Cost of sales 148,200 127,243 429,062 372,266 -------- -------- -------- -------- Gross profit 39,381 31,647 109,878 93,692 -------- -------- -------- -------- Operating expenses 29,113 24,868 84,690 77,017 Merger expenses - - 4,064 - Amortization of intangibles 333 265 838 795 -------- -------- -------- -------- Total operating expenses 29,446 25,133 89,592 77,812 -------- -------- -------- -------- Operating income 9,935 6,514 20,286 15,880 -------- -------- -------- -------- Other expenses (income): Interest expense 1,395 1,237 3,668 4,745 Other, net (197) (169) (546) (471) -------- -------- -------- -------- Total other expenses 1,198 1,068 3,122 4,274 -------- -------- -------- -------- Income before taxes and extraordinary item 8,737 5,446 17,164 11,606 Income taxes 3,658 2,069 8,513 4,640 -------- -------- -------- -------- Income before extraordinary item 5,079 3,377 8,651 6,966 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $662 - - - 933 -------- -------- -------- -------- Net income $ 5,079 $ 3,377 $ 8,651 $ 6,033 ======== ======== ======== ======== Pro forma additional income tax expense - 173 320 179 -------- -------- -------- -------- Pro forma net income before extraordinary item $ 5,079 $ 3,204 $ 8,331 $ 6,787 ======== ======== ======== ======== Per share data (basic): Income before extraordinary item $ 0.29 $ 0.19 $ 0.50 $ 0.44 Extraordinary item - loss on early extinguished of debt, net of income tax benefit of $662 - - - 0.06 -------- -------- -------- -------- Net income $ 0.29 $ 0.19 $ 0.50 $ 0.38 ======== ======== ======== ======== Pro forma net income before extraordinary item $ 0.29 $ 0.18 $ 0.48 $ 0.42 ======== ======== ======== ======== Weighted average basic shares of common stock 17,369 17,357 17,361 16,034 ======== ======== ======== ======== Per share data (diluted): Income before extraordinary item $ 0.29 $ 0.19 $ 0.49 $ 0.42 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $662 - - - 0.06 -------- -------- -------- -------- Net income $ 0.29 $ 0.19 $ 0.49 $ 0.36 ======== ======== ======== ======== Pro forma net income before extraordinary item $ 0.29 $ 0.18 $ 0.48 $ 0.41 ======== ======== ======== ======== Weighted average diluted shares of common stock 17,750 17,539 17,672 16,586 ======== ======== ======== ========
See notes to consolidated financial statements. UNITED NATURAL FOODS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED APRIL 30, ----------------- (in thousands) 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,651 $ 6,033 Adjustments to reconcile net income to net cash used in operating activities: Extraordinary loss on early extinguishment of debt, net of tax benefit - 933 Depreciation and amortization 4,405 4,144 Loss (gain) on disposals of property & equipment 155 (14) Accretion of original issue discount - 153 Deferred income tax benefit - (455) Provision for doubtful accounts 1,388 1,688 Changes in assets and liabilities, net of acquired cocmpanies: Accounts receivable (5,012) (5,840) Inventory (13,845) (12,761) Prepaid expenses (110) (274) Other assets (378) (1,097) Notes receivable, trade (73) (121) Accounts payable 1,380 5,260 Accrued expenses 2,760 (1,029) Income taxes payable (902) 840 -------- -------- Net cash used in operating activities (1,581) (2,540) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of new businesses (20,029) - Proceeds from disposals of property and equipment 400 91 Capital expenditures (11,800) (3,238) -------- -------- Net cash used in investing activities (31,429) (3,147) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (payments) under note payable 26,022 (14,788) Repayments on long-term debt (8,620) (15,739) Proceeds from long-term debt 17,799 833 Principal payments of capital lease obligations (835) (361) Proceeds from issuance of common stock, net - 35,510 Net borrowings on Stow Mills stockholder loans - 561 Dividends paid to Stow Mills stockholders - (25) Cash distributions to Hendrickson partners - (490) -------- -------- Net cash provided by financing activities 34,366 5,501 -------- -------- NET INCREASE (DECERASE) IN CASH 1,356 (186) Cash at beginning of period 952 749 -------- -------- Cash at end of period $ 2,308 $ 563 ======== ======== Supplemental disclosures of cash flow information: - ------------------------------------------------- Cash paid during the period for: Interest $ 3,735 $ 4,551 ======== ======== Income taxes $ 7,669 $ 3,398 ======== ======== See notes to consolidated financial statements. UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS APRIL 30, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements ("financial statements") include the accounts of United Natural Foods, Inc. and its wholly owned subsidiaries (the "Company"). The Company is a distributor and retailer of natural foods and related products. On October 31, 1997, a subsidiary of the Company completed its merger with Stow Mills, Inc. ("Stow Mills") wherein Stow Mills became a wholly owned subsidiary of the Company. The merger with Stow was accounted for as a pooling of interests and, accordingly, all financial information included is reported as though the companies had been combined for all periods reported. Net sales for the quarters ended April 30 and October 31, 1997 and for the nine months ended April 30, 1997 for the Company excluding Stow were approximately $108.1 million, $116.5 million, and $311.0 million, respectively. Net income for the quarters ended April 30 and October 31, 1997 and for the nine months ended April 30, 1997 for the Company excluding Stow was $2.9 million, $1.2 million and $5.5 million, respectively. Net sales for the quarters ended April 30 and October 31, 1997 and for the nine months ended April 30, 1997 for Stow were $50.8 million, $56.9 million and $155.0 million, respectively. Net income (loss) for the quarters ended April 30 and October 31, 1997 and for the nine months ended April 30, 1997 for Stow was $0.5 million, $(1.8) million and $0.5 million, respectively. The financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for interim periods, however, may not be indicative of the results that may be expected for a full year. Certain fiscal 1997 balances have been reclassified to conform to the fiscal 1998 presentation. 2. TRADE ACCOUNTS RECEIVABLE An allowance for doubtful accounts is deducted from trade accounts receivable in the accompanying financial statements. The allowance for doubtful accounts was $2.1 million at April 30, 1998 and $2.3 million at July 31, 1997. 3. NOTE PAYABLE In October 1997, the Company amended its credit agreement with its bank to increase the amount of the facility from $50 million to $100 million, to increase the limit on inventory advances to $50 million and the advance rate to 60%, to establish a term loan of $6.6 million and to increase the aggregate amount of real estate acquisition loans and real estate term loans to $20 million. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The credit facility was used to repay existing indebtedness of Stow owing to the Company's bank at the date of the merger and is used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate or 1.00% above the bank's London Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate for all or a portion of the debt for a period up to 180 days. Interest on the mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the Company has the option to fix the rate for a period of five years at a rate of 1.25% above the five-year U.S Treasury Note rate. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of April 30, 1998, the Company's outstanding borrowings under the credit agreement totaled $56.6 million. The credit agreement expires on July 31, 2002. In connection with the amendment to the Company's credit agreement with its bank as above, an Agency and Interlender Agreement was entered into by the Company, its bank and two additional participating banks effective December 1, 1997. This agreement states, among other things, that the Company's primary bank will participate in this credit facility with the other banks. 6 UNITED NATURAL FOODS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. PRO FORMA NET INCOME Stow was subject to taxation as an S corporation until the merger on October 31, 1997. For pro forma disclosure purposes, income tax adjustments were assumed in order to reflect results as if Stow had been subject to taxation as a C corporation for periods prior to the merger. 5. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. The statement replaces the presentation of primary EPS with a presentation of basic EPS. The statement also requires a dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. This statement is effective for periods ending after December 15, 1997. The Company has calculated earnings per share under the standard for all periods presented. 6. SUBSEQUENT EVENT On June 10, 1998, the Company announced the commencement of a public offering of 3.250 million shares of Common Stock to be sold by the Company (0.800 million shares) and certain selling stockholders (2.450 million shares) at a price of $23.00 per share. In addition, one selling stockholder has granted the underwriters an option to purchase up to an additional 4.875 million shares of Common Stock to cover over-allotments, if any. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW United Natural Foods, Inc. is the leading independent national distributor of natural foods and related products in the United States. In recent years, the Company has increased sales to existing and new customers through the acquisition of or merger with natural products distributors, the opening of distribution centers in new geographic areas, the expansion of existing distribution centers and the continued growth of the natural products industry in general. Through these efforts, management believes that the Company has been able to broaden its geographic penetration, expand its customer base, enhance and diversify its product selections and increase its market share. The Company's distribution operations are divided into three principal regions: Cornucopia Natural Foods, Inc. ("Cornucopia") and Stow Mills in the Eastern Region, Rainbow Natural Foods, Inc. ("Rainbow") in the Central Region and Mountain People's Warehouse Incorporated ("Mountain People's") in the Western Region. Through its Natural Retail Group ("NRG"), the Company also owns and operates 16 retail natural products stores located in the eastern United States. The Company's retail strategy for NRG is to selectively acquire existing natural products stores that meet the Company's strict criteria in areas such as sales growth, profitability, growth potential and store management. Management believes the Company's retail business serves as a natural complement to its distribution business. The Company is continually integrating certain operating functions in order to improve operating efficiencies, including: (i) integrating administrative and accounting functions; (ii) expanding marketing and customer service programs across the three regions; (iii) expanding national purchasing opportunities; (iv) consolidating systems applications between physical locations and regions; and (v) reducing geographic overlap between regions. In addition, the Company's continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. While operating margins may be affected in periods in which expenses are incurred, over the long term, the Company expects to benefit from the increased absorption of its expenses over a larger sales base. In recent years, the Company has made considerable expenditures in connection with the expansion of its facilities, including the expansion of its distribution center and headquarters in Dayville, Connecticut, the relocation of its Denver, Colorado distribution center and the expansion of refrigerated and frozen space at its Auburn, California and Atlanta, Georgia facilities. The Company's net sales consist primarily of sales of natural products to retailers adjusted for customer volume discounts, returns and allowances and, to a lesser extent, sales from its natural products stores. The principal components of the Company's cost of sales include the amount paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to the Company's distribution facilities. Operating expenses include salaries and wages, employee benefits (including payments under the Company's Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, administrative, depreciation, merger expenses and amortization expense. Other expenses include interest payments on outstanding indebtedness, miscellaneous expenses, interest income and miscellaneous income. RECENT ACQUISITIONS The mergers of the Company with Mountain People's and Stow Mills have each been accounted for as a pooling of interests and, accordingly, all information included herein is reported as though United Natural, Mountain People's and Stow Mills had been combined for all periods reported. On May 22, 1995, prior to its merger with United Natural, Mountain People's acquired Nutrasource, Inc. ("Nutrasource"), and on July 29, 1995 the Company acquired Rainbow. The acquisitions of Nutrasource and Rainbow were each accounted for under the purchase method of accounting and, accordingly, all financial information for Nutrasource and Rainbow has been included since the respective dates of acquisition. The excess of 8 the purchase price over the net assets acquired in each of these acquisitions has been recorded as goodwill and is being amortized by the Company over various useful lives, not exceeding 40 years. RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain income and expense items expressed as a percentage of net sales: QUARTER ENDED APRIL 30, 1998 COMPARED TO QUARTER ENDED APRIL 30, 1997
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, --------- --------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 79.0% 80.1% 79.6% 79.9% ----- ----- ----- ----- Gross profit 21.0% 19.9% 20.4% 20.1% ----- ----- ----- ----- Operating expenses 15.5% 15.7% 15.7% 16.5% Merger expenses 0.0% 0.0% 0.8% 0.0% Amortization of intangibles 0.2% 0.2% 0.2% 0.2% ----- ----- ----- ----- Total operating expenses 15.7% 15.8% 16.6% 16.7% ----- ----- ----- ----- Operating income 5.3% 4.1% 3.8% 3.4% ----- ----- ----- ----- Other expense (income): Interest expense 0.7% 0.8% 0.7% 1.0% Other, net -0.1% -0.1% -0.1% -0.1% ----- ----- ----- ----- Total other expense 0.6% 0.7% 0.6% 0.9% ----- ----- ----- ----- Income before extraordinary item and income taxes 4.7% 3.4% 3.2% 2.5% Extraordinary item - Loss on early extinguishment debt (less applicable income taxes) 0.0% 0.0% 0.0% 0.2% ----- ----- ----- ----- Income before income taxes 4.7% 3.4% 3.2% 2.3% Income taxes 2.0% 1.3% 1.6% 1.0% ----- ----- ----- ----- Net income 2.7% 2.1% 1.6% 1.3% ===== ===== ===== =====
Net Sales. The Company's net sales increased approximately 18.1%, or $28.7 million, to $187.6 million for the quarter ended April 30, 1998 from $158.9 million for the quarter ended April 30, 1997. The overall increase in net sales was primarily attributable to increased sales to existing customers, sales to new accounts in existing geographic areas and the introduction of new products not previously offered by the Company. Historical information for Stow Mills for the three months ended April 30, 1997 includes four fewer selling days than in the comparable period in fiscal 1998. Additional net sales of approximately $2.8 million would have been reported by the Company in the 1997 three month period had Stow Mills been on the Company's reporting calendar at that time. As a result, the increases in the Company's net sales for the three month period, adjusted for such additional sales, would have been approximately 16.0%. The increase in net income for the quarter ended April 30, 1998, as adjusted for the above-mentioned item, would have been $1.5 million. Gross Profit. The Company's gross profit increased approximately 24.4%, or $7.7 million, to $39.4 million for the quarter ended April 30, 1998 from $31.6 million for the quarter ended April 30, 1997. The Company's gross profit as a percentage of net sales increased to 21.0% for the quarter ended April 30, 1998 from 19.9% for the quarter ended April 30, 1997. The increase in gross profit as a percentage of net sales resulted partially from greater purchasing efficiencies resulting from the integration of Stow Mills, partially offset by increased sales to existing customers under the Company's volume discount program. Operating Expenses. The Company's total operating expenses increased approximately 17.2%, or $4.3 million, to $29.4 million for the quarter ended April 30, 1998 from $25.1 million for the quarter ended April 30, 1997. As a percentage of net sales, operating expenses decreased to 15.7% for the quarter ended April 30, 1998 from 15.8% for the quarter ended April 30, 1997. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's ability to leverage its overhead and realize synergies from recent acquisitions. Included in operating expenses for the quarter ended April 30, 1997 were Stow Mills officer salaries totaling $0.5 million in excess of the contractual agreements entered into in connection with the merger with Stow Mills. Excluding these excess amounts, operating expenses for the quarter ended April 30, 1997 would have been $24.6 million, or 15.5% of net sales. Operating Income. Operating income increased $3.4 million, or approximately 52.5%, to $9.9 million for the quarter ended April 30, 1998 from $6.5 million for the quarter ended April 30, 1997. As a percentage of net sales, operating income increased to 5.3% in the quarter ended April 30, 1998 from 4.1% in the quarter ended April 30, 1997. 9 Other (Income)/Expense. The $0.1 million increase in other expense in the quarter ended April 30, 1998 compared to the quarter ended April 30, 1997 was primarily attributable to an increase in interest expense as a result of a higher level of debt in 1998 than in 1997. Income Taxes. The Company's effective income tax rates were 41.9% and 38.0% for the quarters ended April 30, 1998 and 1997, respectively. The effective rates were higher than the federal statutory rate primarily due to state and local income taxes, partially offset in 1997 by the fact that Stow Mills was an S Corporation prior to the merger and, as such, had no federal tax expense. The increase in the effective rate was primarily attributable to increased earnings in higher state tax jurisdictions, as well as Stow Mills being subject to federal tax in 1998. Net Income. As a result of the foregoing, the Company's net income increased by $1.7 million to $5.1 million, or 2.7% of net sales, for the quarter ended April 30, 1998 from $3.4 million, or 2.1% of net sales, in the quarter ended April 30, 1997. NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997 Net Sales. The Company's net sales increased approximately 15.7%, or $73.0 million, to $538.9 million for the nine months ended April 30, 1998 from $466.0 million for the nine months ended April 30, 1997. The overall increase in net sales was primarily attributable to increased sales to existing customers, sales to new accounts in existing geographic areas and the introduction of new products not previously offered by the Company. Historical information for Stow Mills for the nine months ended April 30, 1997 includes four fewer selling days than in the comparable periods in fiscal 1998. Additional net sales of approximately $2.8 million would have been reported by the Company in the fiscal 1997 period had Stow Mills been on the Company's reporting calendar at that time. As a result, the increases in the Company's net sales for the nine month period, adjusted for such additional sales, would have been approximately 15.0%. The increase in income before extraordinary item for the nine months ended April 30, 1998, as adjusted for the above-mentioned item, would have been $1.5 million. Gross Profit. The Company's gross profit increased approximately 17.3%, or $16.2 million, to $109.9 million for the nine months ended April 30, 1998 from $93.7 million for the nine months ended April 30, 1997. The Company's gross profit as a percentage of net sales increased to 20.4% for the nine months ended April 30, 1998 from 20.1% for the nine months ended April 30, 1997. The increase in gross profit as a percentage of net sales resulted partially from greater purchasing efficiencies resulting from the integration of Stow Mills, partially offset by increased sales to existing customers under the Company's volume discount program. Operating Expenses. The Company's total operating expenses increased approximately 15.1%, or $11.8 million, to $89.6 million for the nine months ended April 30, 1998 from $77.8 million for the nine months ended April 30, 1997. As a percentage of net sales, operating expenses decreased to 16.6% for the nine months ended April 30, 1998 from 16.7% for the nine months ended April 30, 1997. Excluding merger costs of $4.1 million, the Company's total operating expenses for the nine months ended April 30, 1998 would have been $85.5 million, or 15.9% of net sales, representing an increase of $7.7 million, or 9.9%, over the comparable prior period. The decrease in total operating expenses as a percentage of net sales was primarily attributable to the Company's ability to leverage its overhead and realize synergies from recent acquisitions. 10 Operating Income. Operating income increased $4.4 million, or approximately 27.7%, to $20.3 million for the nine months ended April 30, 1998 from $15.9 million for the nine months ended April 30, 1997. As a percentage of net sales, operating income increased to 3.8% in the nine months ended April 30, 1998 from 3.4% in the comparable 1997 period. Excluding the merger costs noted above, operating income for the nine months ended April 30, 1998 would have been $24.4 million (representing an increase of 53.3% over the prior period), or 4.5% of net sales. Other (Income)/Expense. The $1.2 million decrease in other expense in the nine months ended April 30, 1998 compared to the nine months ended April 30, 1997 was primarily attributable to the reduction in interest expense in the first six months of fiscal 1998 relating to the repayment of Stow Mills' debt with proceeds from the Company's credit facility, which bears interest at a lower rate. In addition, the proceeds from the Company's initial public offering were used to repay debt. Income Taxes. The Company's effective income tax rates were 49.6% and 40.2% for the nine months ended April 30, 1998 and 1997, respectively. The effective rates were higher than the federal statutory rate primarily due to nondeductible merger costs incurred during the first quarter of fiscal 1998 and state and local income taxes, partially offset by the fact that Stow Mills was an S Corporation prior to the merger and, as such, had no federal tax expense. Net Income. As a result of the foregoing, the Company's net income increased by $2.6 million to $8.7 million for the nine months ended April 30, 1998 from $6.0 million in the nine months ended April 30, 1997. Excluding the $4.1 million (net of taxes) in merger costs in fiscal 1998 and $0.9 million extraordinary item (net of taxes) related to the early extinguishment of debt in fiscal 1997, net income would have been $12.7 million (representing an increase of 82.5% over the prior period), or 2.4% of net sales, and $7.0 million, or 1.5% of net sales, for the nine months ended April 30, 1998 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company historically has financed its operations and growth primarily from cash flows from operations, borrowings under its credit facility, seller financing of acquisitions, operating and capital leases, trade payables, bank indebtedness and the sale of debt and equity securities. Primary uses of capital have been acquisitions, expansion of plant and equipment and investment in accounts receivable and inventory. Net cash used in operations was $1.6 million and $2.5 million for the nine months ended April 30, 1998 and 1997, respectively. Excluding merger expenses of $4.1 million, net cash provided by operations in fiscal 1998 would have been $2.5 million. The Company's cash provided by operations in fiscal 1998, excluding merger expenses, is due primarily to net income plus depreciation and amortization, offset by investments in accounts receivable and inventory in the ordinary course of business. The Company's cash used in operations in fiscal 1997 related primarily to investments in accounts receivable and inventory in the ordinary course of business. The increases in inventory levels relate to supporting increased sales with wider product assortment combined with the Company's ability to capture purchasing efficiency opportunities in excess of total carrying costs. The Company's working capital at April 30, 1998 was $47.0 million. Net cash used in investing activities was $31.4 million and $3.1 million for the nine months ended April 30, 1998 and 1997, respectively. Investing activities in 1998 were primarily for the acquisition of new businesses and the purchase of a warehouse, as well as the continued upgrade of existing management information systems. Investing activities in 1997 included primarily capital expenditures related to the purchase of material handling equipment and 11 the continued upgrade of existing management information systems. The Company's capital expenditures were primarily funded from senior bank indebtedness, including term loans. Cash provided by financing activities was $34.3 million and $5.5 million for the nine months ended April 30, 1998 and 1997, respectively. During 1998, the Company had net borrowing on its line of credit of $26.0 million and proceeds from long-term debt of $17.8 million. During fiscal 1997, the Company issued 2.9 million shares of its common stock in its initial public offering, which resulted in net proceeds to the Company of $35.5 million. The proceeds were used to repay indebtedness of the Company. In October 1997, the Company amended its credit agreement with its bank to increase the amount of the facility from $50 million to $100 million, to increase the limit on inventory advances to $50 million and the advance rate to 60%, to establish a term loan of $6.6 million and to increase the aggregate amount of real estate acquisition loans and real estate term loans to $20 million. The agreement also provides for the bank to syndicate the credit facility to other banks and lending institutions. The credit facility was used to repay existing indebtedness of Stow Mills owing to the Company's bank and is used for general operating capital needs. Interest under the facility, except the portion related to the mortgage commitments, accrues at the Company's option at the New York Prime Rate or 1.00% above the bank's London Interbank Offered Rate (LIBOR), and the Company has the option to fix the rate for all or a portion of the debt for a period up to 180 days. Interest on the mortgage facility will accrue at 1.25% above the bank's LIBOR rate, although the Company has the option to fix the rate for a period of five years at a rate of 1.25% above the five-year rate for U.S. Treasury Notes. The Company has pledged all of its assets as collateral for its obligations under the credit agreement. As of April 30, 1998, the Company's outstanding borrowings under the credit agreement totaled $56.6 million. The credit agreement expires on July 31, 2002. The Company expects to spend approximately $25 million over the next five years in capital expenditures to fund the expansion of existing facilities, upgrade information systems and technology and update its material handling equipment. Included in this amount are $3 to $5 million in capital expenditures in the 1998 and 1999 calendar years for the Company's Year 2000 upgrade and new warehouse management system, including new hardware and installation. IMPACT OF INFLATION Historically, the Company has been able to pass along inflation-related increases. Consequently, inflation has not had a material impact upon the results of the Company's operations or profitability. SEASONALITY Generally, the Company does not experience any material seasonality. However, the Company's sales and operating results may vary significantly from quarter to quarter due to factors such as changes in the Company's operating expenses, management's ability to execute the Company's operating and growth strategies, personnel changes, demand for natural products, supply shortages and general economic conditions. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of Information about Capital Structure." This statement establishes standards for disclosing information about an entity's capital structure. This statement is effective for periods ending after December 15, 1997. The Company is in compliance with this standard. The Financial Accounting Standards Board recently issued SFAS No. 130,"Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. This statement is effective for fiscal years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods provided for comparative purposes. The Company will comply with the required presentation in fiscal 1999. 12 The Financial Accounting Standards Board recently issued SFAS No. 131,"Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for reporting operating segments of publicly traded business enterprises in annual and interim financial statements and requires that those enterprises report selected information about operating segments. This statement supersedes SFAS No. 14, "Financial Reporting for Segments of a Business," but retains the requirement to report information about major customers. This statement also amends SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries." SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997 and requires that comparative information for earlier years be restated. The Company has not yet determined what impact, if any, this standard will have on its financial statement presentation. The Financial Accounting Standards Board recently issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement standardizes disclosure requirements for pensions and other postretirement benefits, and is effective for fiscal years beginning after December 15, 1997. This statement does not apply to the Company as the Company does not currently sponsor any defined benefit plans. YEAR 2000 ISSUES The Company's financial accounting systems are Year 2000 compliant. The Company's Eastern Region and its Chicago facility are not currently Year 2000 compliant. The Company is currently reviewing its operational business systems to ensure Year 2000 compliance and to enhance its business systems functionality to achieve operating efficiencies and customer service improvements. The Company plans to purchase packaged software to address Year 2000 issues when available. The Company expects to incur $3 to $5 million in expenditures in the 1998 and 1999 calendar years for its Year 2000 upgrade and new warehouse management systems, including new hardware and installation .However, there can be no assurance that the systems of other companies on which the Company's systems rely also will be timely converted or that any such failure to convert by another company would not have a material adverse effect on the Company's business, financial condition or results of operations. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time. Any statements contained herein (including without limitations statements to the effect that the Company or its management "believes," "expects," "anticipates," "plans" and similar expressions) that are not statements of historical fact should be considered forward-looking statements. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the Company's common stock. A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, continued demand for current products offered by the Company, the success of the Company's acquisition strategy, competitive pressures, general economic conditions, the success of new product introductions and government regulation. A significant portion of the Company's historical growth has been achieved through acquisitions of or mergers with other distributors of natural products. The Company recently acquired or merged with four large regional distributors of natural products. The successful and timely integration of these acquisitions and mergers is critical to future operating and financial performance of the Company. While the integration of these acquisitions and mergers with the Company's existing operations has begun, the Company believes that the integration will not be substantially completed until the end of calendar 1998. The integration will require, among other things, coordination of administrative, sales and marketing, distribution, and accounting and finance functions and expansion of information and warehouse management systems among the Company's regional operations. The integration process could divert the attention of management, and any difficulties or problems encountered in the transition process could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the process of combining the companies could cause the interruption of, or loss of 13 momentum in, the activities of the respective businesses, which could have an adverse effect on their combined operations. The Company is currently experiencing a period of growth which could place a significant strain on its management and other resources. The Company's business has grown significantly in size and complexity over the past several years. The growth in the size of the Company's business and operations has placed and is expected to continue to place a significant strain on the Company's management. The Company's future growth is limited in part by the size and location of its distribution centers. There can be no assurance that the Company will be able to successfully expand its existing distribution facilities or open new distribution facilities in new or existing markets to facilitate growth. In addition, the Company's growth strategy to expand its market presence includes possible additional acquisitions. To the extent the Company's future growth includes acquisitions, there can be no assurance that it will successfully identify suitable acquisition candidates, consummate and integrate such potential acquisitions or expand into new markets. The Company operates in highly competitive markets, and its future success will be largely dependent on its ability to provide quality products and services at competitive prices. The Company's competition comes from a variety of sources, including other distributors of natural products as well as specialty grocery and mass market grocery distributors. There can be no assurance that the mass market grocery distributors will not increase their emphasis on natural products and more directly compete with the Company or that new competitors will not enter the market. The grocery distribution industry generally is characterized by relatively high volume with relatively low profit margins. The continuing consolidation of retailers in the natural products industry and the emergence of natural products supermarket chains may have an adverse effect on the Company's profit margins in the future as more customers qualify for greater volume discounts offered by the Company. The grocery industry is also sensitive to national and regional economic conditions, and the demand for product supply may be adversely affected from time to time by economic downturns. 14 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits The exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Quarterly Report on Form 10-Q. b) Reports on Form 8-K. On April 22, 1998, the Company filed a Current Report on Form 8-K dated April 22, 1998 restating under Item 5 (Other Events) financial statements and other financial information, and presenting under Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) the following information: EXHIBITS. 11 - Computation of Net Earnings per Share for the year ended October 31, 1995, the nine months ended July 31, 1996, the year ended July 31, 1997 and the six months ended January 31, 1997 and 1998. 23 - Consent of KPMG Peat Marwick LLP, independent auditors. 27.1 - Restated Financial Data Schedules - six months ended January 31, 1998 and three months ended October 31, 1997. 27.2 - Restated Financial Data Schedules - year ended July 31, 1997, nine months ended April 30, 1997 and six months ended January 31, 1997. 27.3 - Restated Financial Data Schedules - three months ended October 31, 1996, nine months ended July 31, 1996 and year ended October 31, 1995. 99.1 - Selected Consolidated Financial Data. 99.2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. 99.3 - Consolidated Financial Statements of United Natural Foods, Inc. as of October 31, 1995, July 31, 1996 and 1997 and January 31, 1998 (unaudited) and for the year ended October 31, 1995, the nine months ended July 31, 1996, the year ended July 31, 1997 and the six months ended January 31, 1997 and 1998 (unaudited) and Reports of Independent Accountants thereon. 99.4 - Schedule II - Valuation and Qualifying Accounts and Report of Independent Accountants thereon. EXHIBIT INDEX
Exhibit No. DESCRIPTION - ----------- ----------- 11 Computation of Earnings Per Share 27 Financial Data Schedule
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNITED NATURAL FOODS, INC. /s/ Robert T. Cirulnick _____________________________ Robert T. Cirulnick Chief Financial Officer (Principal Financial and Accounting Officer) Dated: June 12, 1998 EX-11 2 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 UNITED NATURAL FOODS INC. COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED APRIL 30, APRIL 30, (in thousands, except per share data) 1998 1997 1998 1997 ---- ---- ---- ---- Basic weighted average shares outstanding 17,369 17,357 17,361 16,034 Net affect of dilutive stock options based upon the treasury stock method using the average stock price 381 183 311 553 ------ ------ ------ ------ Diluted weighted average shares outstanding 17,750 17,539 17,672 16,586 ====== ====== ====== ====== Income before extraordinary item $5,079 $3,377 $8,651 $6,966 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $662 - - - 933 ------ ------ ------ ------ Net income $5,079 $3,377 $8,851 $6,787 ====== ====== ====== ====== Pro forma net income before extraordinary item $5,079 $3,204 $8,331 $6,787 ====== ====== ====== ====== Basic Per Share Data: Income before extraordinary item $ 0.29 $ 0.19 $ 0.50 $ 0.44 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $662 $ - $ - $ - $ 0.06 ------ ------ ------ ------ Net income $ 0.29 $ 0.19 $ 0.50 $ 0.38 ====== ====== ====== ====== Pro forma net income before extraordinary item $ 0.29 $ 0.18 $ 0.48 $ 0.42 ====== ====== ====== ====== Diluted Per Share Data: Income before extraordinary item $ 0.29 $ 0.19 $ 0.49 $ 0.42 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $662 $ - $ - $ - $ 0.06 ------ ------ ------ ------ Net income $ 0.29 $ 0.19 $ 0.49 $ 0.36 ====== ====== ====== ====== Pro forma net income before extraordinary item $ 0.29 $ 0.18 $ 0.48 $ 0.41 ====== ====== ====== ======
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED APRIL 30, 1998 AND THE CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JUL-31-1998 APR-30-1998 2,308 0 51,475 2,092 90,345 147,447 65,252 22,765 212,280 100,460 28,453 0 0 174 82,515 212,280 538,940 538,940 429,062 429,062 0 1,388 3,668 17,164 8,513 8,651 0 0 0 8,651 0.50 0.49
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